Audit: N.C. Medicaid in Major Disarray, Wastes Millions

McCrory says mismanagement precludes Obamacare-related expansion

RALEIGH — North Carolina’s Medicaid program is in a major state of disarray, costing taxpayers “hundreds of millions of dollars” in mismanagement, a blistering state audit revealed.

The Medicaid program deliberately violates General Assembly directives and potentially state statutes, the audit said. The program has a talent deficit in personnel capable of preparing accurate budgets or understanding the data with which they must work to administer $36 million in services daily to 1.5 million participants, according to the audit.

Gov. Pat McCrory, a Republican, said the fiscal, accounting, contractual, and operational tentacles of the Medicaid calamity reinforces his belief that its rolls should not be expanded under Obamacare, although the issue is still being explored for a later decision.

Bills already have been introduced in the state House and Senate to block both expansion of Medicaid — the government insurance program for the poor — and creation of health care exchanges through which recipients would buy government approved plans.

“It’s hard for me to say today that we are going to do that when we’ve got these existing programs that we need to fix,” McCrory said Thursday at a news conference with Democratic State Auditor Beth Wood, Department of Health and Human Services Secretary Aldona Wos, and Carol Steckel, the state’s new Medicaid director.

“At this time my total focus is going to be on reforming Medicaid. After reforming Medicaid and fixing the existing system we have, we’ll go through a thorough review of other options that are available for us,” McCrory said.

"I’m talking with the federal people and legislators on steps that we can take to reform the system and that often even overlaps into the Medicaid expansion issue, and that’s where we’re doing our homework right now,” McCrory added.

Wood said the 70-page audit, covering the period from 2009-12, contains 20 recommendations for improvement, many of which have to do with budget planning and forecasts.

Moreover, McCrory said another audit of the Department of Health and Human Services is under way covering more current matters. Neither he nor Wood would say what it involved because it is likely to include investigative work.

“The potential savings through improved administration and better management of the program could be enormous for our citizens, perhaps reaching hundreds of millions of dollars,” Wood said.

“For the last three fiscal years, the state of North Carolina has exceeded the certified budget in the Medicaid spending area of over $1.4 billion in each year,” Wood said. Of that, she said, $375 million each year is state dollars; the balance is federal funds.

The Division of Medical Assistance, which is responsible for Medicaid, is incapable of forecasting multi-year budgets or providing accurate information on the current budget year, according to audit findings.

As an example, Wood said, the division provided forecasts for only five of the 14 categories in which Medicaid money is spent.

Two categories had more than $190 million in shortfalls combined due to poor budgeting, Wood said. Another had an unanticipated $127 million surplus.

“In at least one case, Medicaid program officials told us that they didn’t really know what the spending was going to be in that particular area, and so they budgeted zero dollars,” Wood said.

“Cost overruns will not be tolerated and will not be acceptable. There’s a budget for a reason,” Wos said, “and we must adhere to this budget.”

The Medicaid budget is about $13 billion annually, of which $3 billion is state funding. By contrast, Wood said, the rest of the state's General Fund budget is $18 billion.

A major reason for the shoddy Medicaid budget projections is personnel-related.

“We don’t have the talent in order to provide the right data in our forecasting in order to create proper budgets,” Wos said.

Wos said her recent hiring of Carol Steckel, a nationally recognized expert in the Medicaid arena, is evidence of how strongly she is taking the charge to reform the state’s delivery of the program’s services. Steckel already is making departmental policy and procedure changes through systemic reviews of operations.

Among other audit findings, Wood said, is that North Carolina spends 38 percent more — or $180 million — on Medicaid administrative costs than the average spent in nine peer states that were reviewed. Administrative costs eat up about 6 percent of North Carolina’s Medicaid program. Those costs averaged 4.5 percent in the nine states with similarly sized programs.

Although the Division of Medical Assistance is the primary provider for Medicaid services, two-thirds of spending was done by 10 other divisions for which “there is no cost accountability,” Wood said.

“While DMA is spending about half of its administrative costs on contracted services, we don’t really know how much other contracted services are being done by these other 10 divisions and whether or not they are properly tracking their costs,” Wood said.

Without such monitoring safeguards, the state cannot properly budget Medicaid expenses or know when budgeted allocations have been exhausted. That leads to perennial major budget overruns, she said.

The audit also raised red flags about possible legal problems.

“We found that the division’s budget and developmental practices potentially violate state statutes that have been enacted to ensure agency and legislative accountability of these public expenditures,” Wood said. “We also found that the division clearly violated three directives from the General Assembly.”

In one instance, specific directives from the General Assembly to return $131 million in drug rebate money to the federal government were violated, even after the Division of Medical Assistance was warned that withholding the money would be a violation, Wood said. The situation has been going on for years, she said.

In another, the division refused to eliminate inflationary increases for nursing facilities after the General Assembly prohibited them, “and that resulted in $13 million in unplanned spending,” Wood said.

“In the third case the audit raises questions about whether the nonprofit Community Care of North Carolina is really providing the level of savings that they say they are,” she said. That nonprofit agency administers the Medicaid program under contract to the state.

“The people of North Carolina have sent us here to fix a broken government and that is exactly what we are going to do,” McCrory said.

“Every dollar that is mismanaged at HHS for Medicaid is one dollar less that is available for medical services, for education, for things like road and bridge repair,” he said.

“You cannot make good decisions … with bad information, and right now there’s a lot of bad information floating around, and we need to get the facts, and that is exactly what the state auditor is doing for us,” McCrory said.

The governor said he has directed his other Cabinet secretaries to advise the auditor’s office of oddities and irregularities they are finding and to cooperate with her questioning. Some already are reporting findings similar to those in DHHS, he said.

Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.